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johnpostava

USA
35 Posts

Posted - 02/12/2003 :  22:27:22  Show Profile
One of our insurance carrier clients is currently defending a class action litigation centered around the payment of General Contractor Overhead and Profit (GCOP). A group of policyholders (or an attorney with a good point) got together and contend that claim victims that sustain a (property) loss and elect to handle their own repairs are at an economic disadvantage compared to insureds who hire GC's. The plainiff's contend that insureds who hire GC's to supervise the repairs are paid "more" than insureds who supervise the repairs themselves.

It is my personal opinion that GCOP should only be paid when the adjuster knows or becomes aware of a GC being involved in the restoration. If an insured wishes to hire and supervise his or her own subcontractors, GC overhead and profit should not be paid. I am sure we all agree that a policyholder should never PROFIT from their own insurance loss,

but...

in all fairness, if an insured takes time off from work, spends time scheduling workers and inspects repairs as they are completed, maybe they are entitled to be compensated in some way. Although not actually "overhead" in the GC sense (i.e. workman's comp insurance, liability insurance, equipment, etc.), maybe insureds should be paid some type of allowance.

I'd like to hear other adjuster's opinions with regards to this issue. Should insureds be paid to supervise their own repairs? Should this payment be standard operating procedure for an insurance carrier to pay on every property claim or should it be left up to the disgretion of the adjuster handling the loss?

The "rule of thumb" has always been (at least since I started in the business) to include GCOP if the repairs to the structure meet or exceed three construction trades. Should we have a new rule of thumb for fair compensation to insureds who handle their own repairs without a GC?

This is a very important issue and one that will not be going away for a while. I look forward to all CADO responses.

CCarr

Canada
1200 Posts

Posted - 02/12/2003 :  22:57:27  Show Profile
John, it's all in the 'but ....'.

In all fairness, if an insured;
(a) takes time off work
(b) spends time scheduling workers
(c) spends time inspecting progress and repairs

plus, other 'items' people will bring forward to the issue, then yes; they are entitled to be compensated. Call it an 'allowance' if you want, but it is 'overhead' to the insured.

I believe this should be standard operating procedure for a carrier (a best practice), to pay on each cas settlement; and not be a discretionary item for an adjuster to decide.

I agree with your stated 'rule of thumb', but time will prove we do need two 'thumbs'.

I think I may some some recent material on discussions of this issue, I'll look and come back, if I find it.

Now, on the other side of the coin, related to cash settlements, and I don't want to muddy the water; but as much as I think a change is required as I stated regarding 'insured OH', I also feel a change should be made in the repair values given to an insured on a cash basis. Most of the values allowed are based on 'contractor pricing', and they quite nicely / too nicely compensate an insured who does his own thing and accomplishes the repair within the scope presented. I feel this is as bad a situation, as the principal of not allowing 'insured OH'. But, I see the two as distinct from each other, and you cann't cancel them out by saying you were too well paid based on contractors prices to do this yourself and therefore we owe you nothing for your 'overhead'.
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katadj

USA
315 Posts

Posted - 02/12/2003 :  23:06:10  Show Profile
This topic is sure to open many eyes and probably close some doors, but for the sake of discussion, we shall attempt to give a reasonable explanation.

(This is not meant to be an opinion, just a reasonable approach to answer the posed question)

It is , as John pointed out, the rule that NO insured shall profit from a loss. That being said, is not the contrary applicable? NO insured should LOSE on a loss. (Deductibles notwithstanding)

There are many occassions when the loss can and is repaired by the insured. BUT is it done on company time, or on their personal time, time taken off from work?, Is it done on vacation days, sick leave, personal days?

If, in fact, the insured does the work, and is NOT compensated for their time effort and ability, are they not suffering a loss that they should not have to suffer?

The unwritten "rules of the road" for the carriers is that they will pay OH&P for three trades or more. HOWEVER, many times they will NOT pay for specific trades that they can have a direct agreement with, such as Roofing, Siding, Guttering, Carpeting. Sometimes, when these trades are incorporated into the estimates that are proffered they may exclude the OH&P on them.

Each area of the country will dictate the payments. Some states have mandated total replacement of siding if a portion is damaged. Other areas dictate that a certain percentage of a roof area is deemed damaged it can be deemed a total loss, even if parts are not damaged.

The NFIP rulings are that they will only pay OH&P if the insured enters into a contact with a GC or in some cases, the insured states that it is their "intention" to do this. BUT, when the insured wishes to oversee the repairs, participate in the work, and function as a superintendent, the NFIP can "allow" a certain percentage for this.

Each loss must stand on it's own merit. Can an elderly person, or an incapacitated person make repairs that a young talented person can, HARDLY.

The three trade rule was here long before most of us, and while it seems to be reasonable, it is misused in many ways. It is time for some standard "rules of the road" to be implemented and adhered to.

The implementation of the OH&P also affects the fee schedules that we all work for. If one adds the 20-25 % to the gross covered loss, in most cases this will increase the fee schedules. The carriers do not like this, because we are an un-allocated loss expense, and that will only add to this exposure.

IMHO, it is the right for any insured to have their property repaired in LK&Q , in as good as or better than condition, as is stated in the policy.

How many losses, with several trades, can be done by an insured that may include, Tearout, disposal, sheetrock, insulation,painting,carpentry, electrical, HVAC?
Work like this needs the attention of qualified, competent, insured, bonded, licensed people. ( General Contractor, comes to mind)

This topic is indeed timely and someone, somewhere, someday, will sort it all out.

The old adage of "Pay me now or PAY me a lot later" may surface.



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Newt

USA
657 Posts

Posted - 02/13/2003 :  08:45:47  Show Profile
Shopping for materials should be worth something, depending on the location. The insured will have to locate the material and haul them to the site unless they are delivered. The labor is included in the estimate. So it boils down to no profit, and only overhead which is use of tools and procurement. This could be titled differently. IMHO
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j6407

USA
14 Posts

Posted - 02/13/2003 :  08:59:38  Show Profile
I worked a storm in Muskegan,MA a couple of years ago. It was with the good neighbor group. They had lost a class action lawsuite over the same question. The company was holding back O & P until work was done and a signed contract with/from a GC was in hand. The courts said no. This puts the homeowner at a disadvantage in negotiating an agreement with the GC for the repairs. So the company was paying o & P upfront on all losses. Made for nice billing.
NFIP is now allowing 8% Overhead to the homeowner . If they get a contractor than they get the balance 12% when they submite request for the hold back.
How O&P is handled depends on the state, storm, Insurance company and the stars.
My opinion is that they homeonwer should get some compensation for overhead and 8% seems reasonable.
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william s cook

53 Posts

Posted - 02/13/2003 :  09:45:37  Show Profile
Please consider that I use the rule of thumb of cumulative O&P and also use rule of thumb that the O = 15.3 percent. This of course is considering that rules of thumb are acceptable practices in the claims damage arena and that my thumb has equal standing in this arena.
William S Cook
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Russ

USA
75 Posts

Posted - 02/13/2003 :  10:17:28  Show Profile
If three trades are involved and I know an insured is going to do their own repairs, I always ask the carrier if they will allow me to pay Overhead only usually Between 5% and 7%. If it fit involves a Roofing Contractor claiming Gutters, Trim and Shingles constitute three trades they will always say no.

I do believe an Insured should be paid for spending time hiring subcontractors, buying materials, Supervision, some thing a GC is getting paid for, which would put a Homeowner at a financial disadvantage. Its always up to the Carrier, but it never hurts to ask!! Have a great day and please, work safe.
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inside man

45 Posts

Posted - 02/13/2003 :  10:36:26  Show Profile
Bill,
As a rule of thumb, no carrier that I have ever worked for will pay cumulative O&P
It's always 10 & 10 which equates to 20% total.
Maybe I am misunderstanding what you are saying?
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KileAnderson

USA
875 Posts

Posted - 02/13/2003 :  10:55:55  Show Profile
Katadj said that if an insured takes time off from work to do the job themselves or on their vacation time they should be compensated for it. The problem with that is the estimate includes labor for the work being done, not just the materials so the insured is being compensated for the labor already. I have no problem with paying O&P. If that's what the carrier tells me to do I'll do it. But I don't see the logic in paying an insured O&P when he technically has no overhead, no office to maintain, no workman's comp, no employees to compensate, no yellow pages add to pay for, and by law is not entitled to profit.

Maybe it's just my independent streak and outright disdain for lawyers but I think if someone has a loss and they get paid for the damages that's all they deserve unless they incur actual expenses such as hiring a GC where it's warranted they are not entitled to anything else.
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Jim_Docherty

USA
4 Posts

Posted - 02/13/2003 :  11:00:55  Show Profile
Given replacement cost included in just about every repair to building damage in H.O. claims it could be argued the insured almost always profits from repairs.

It is also naive to think that 10% and 10% is anything but a concoction of the insurance industry. These percentages have no basis in reality. Any contractor working on homeowners repairs will tell you this is nowhere near the margin necessary to survive and make a profit.

Conversely, 10% and 10% on large losses is probably too much. It does not take much of a commercial fire to reach a million bucks these days.

My own opinion? Take each case on it's merits. There seems to me no good reason contractor/homeowner should get O/H & P while his store clerk nieghbor should not. This is done almost automatically in many cases creating a 2 tier adjustment. If you base your adjustments on your insured's profession you're looking for trouble.

Just a couple of thoughts. We all know we'll do what we're told in the end.
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Newt

USA
657 Posts

Posted - 02/13/2003 :  11:27:30  Show Profile
I can't understand why a carrier would balk at paying for the procurement or materials an use of tools if the insured does the work himself. They are willing to pay much more for the GC to do it, when paying him twice for profit. Many times the GC will sub out most of the work and require the subs to maintain insurance and workmens comp. The carrier saves money when the owner does the work himself. It could be a substantual savings.
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katadj

USA
315 Posts

Posted - 02/13/2003 :  11:36:22  Show Profile
Jim has hit the nail on the head. The 10&10 (20%) or 10 on 10 (21%) or even in the NE where it is 10 & 15 or 25% is not enough to cover the costs of being in business.

Almost every GC you can ask, and this is supported by the federal reporting agencies, will admit to an overhead factor that exceed 20%, most times it varies between 23-27% depending on volume.

Ergo, there is some built-in excess in the line item pricing to cover the actual OH&P. If the contractor cannot make a reasonable profit on their work they will not be here long. FYI, the 5 year national failure rate for contractors is in excess of 70%. Mostly due to under capitalization, erroneous estimating, and poor markup on their bids.

While Kile correctly states that there is built in labor costs in the unit pricing, does a Catadjuster, earning 500-750 per day, take time off from work to make repairs that he can hire someone for 200 a day?

If you check the line item pricing for the labor breakout, you will find the hourly rate. This in no way is the actual costs incurred by a GC. The burden of SUI, WC,Vacation,Sick Time, etc. will elevate these costs far beyond the published hourly rate.

The measure of costs is totally dependent on the contractor's ability to run an efficient operation, and even in the best of cases not all projects are profitable.

Have you ever considered why the Carrier has, for the most part, not opted to "make the repairs" as is their right? They know that this will cost them dearly, and then, they have to satisfy the insured and guarantee the work. ( Ain't gonna happen)

The estimating programs we use are simply "guidelines" and we must always remember this. Every job is different and the costs are directly related to the type, difficulty, location, time of year, availablity of labor and product.

Take the time to really consider the work that has to be done, imagine yourself doing the work, think about all of the hidden costs, and then see if you can do it for the "guideline "pricing.

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Newt

USA
657 Posts

Posted - 02/13/2003 :  13:55:29  Show Profile
Think about all the waste left over from a job, if you have a lot, there goes profit. The estimate doesnt include all the defective materials you get that is wasted. There is no waste factor on lumber and few boards are perfect and none cut to length. Steel structures are even worse, much of it is sold by the pound.
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william s cook

53 Posts

Posted - 02/13/2003 :  16:14:28  Show Profile
From the Dark Side
Texas, Colorado and Kentucky Departments of Insurance have found withholding of of contactors overhead and profit to an insured to be an improper practice. See Texas DOI Bulletin #B-0045 see colarado 12-98 Bulletin. See Kentucky DOI order dated Dec 8, 1994. Several other states have court cases indicating that withholding O/P to an insured is an unfair practice.
One must not address the issues of a homeowners entitlements to these sums on a replacment cost policy without proper research for the venue at hand.
William S Cook
Public Adjuster
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Newt

USA
657 Posts

Posted - 02/13/2003 :  17:21:52  Show Profile
This may be common place soon, I understand Ok has a class action suit in the works. It doesn't matter, they just take it back in premiums.
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Cheryl Joyce

USA
45 Posts

Posted - 02/13/2003 :  21:06:50  Show Profile
This issue is specifically addressed with the State Board of Insurance (in most states if not all) It has been determined that Contractor O & P can not be withheld as the insurance company COLLECTS INSURANCE PREMIUM which includes this consideration and therefore MUST pay a claim based on the same CONSIDERATION (paying O & P as part of the claim). They have deemed the same fair handling basis in "collecting" premium as in "paying" the claim. It is the collection of premium (a pre determined amount for a stipulated amount of risk) that binds an insurance contract to both parties i.e. the company "selling the product" and the insured buying the "peace of mind". The policy does not read nor does the agent or company say "we will reduce the price of our product if you want to repair your own damages, but your neighbor is going to hire a contractor and get paid more". The same amount of premium is collected for the policy no matter who makes the repair.

The proper way to address this issue is to create the appraisal, include the O & P, when appropriate, and submit it with your report. It SHOULD be up to the individual company to either include it or to eliminate it, based upon their procedure of handling.

Don't confuse me with saying that " INDIVIDUAL company handling practice or procedure and is ok for some companies not to include it (it is NOT ok to exclude O & P if it qualifies). If you include it in your appraisal and submit a note with your report stating that they can subtract it, then you clear yourself from improper claim practice.

The next thing that will happen is that your supervisor is going to get a call from the client stating that you have VIOLATED their client instructions by putting it on the appraisal. Then you are going to get a phone call from your supervisor asking, "why didn't you comply with the client instructions? -you have them OR "access" to the instruction!!!". If your company is big enough, they write you up as "not following client instructions" but at least you will have a record of your recommendations and that YOU have submitted the appraisal according to the proper claims handling procedure set forth with your state compliance. Granted, you can only do this for so long before your employee records contains enough of "non compliance issue complaints", but you are doing the right thing.

OK reality check, -- most cases -the request for elimination of O & P will be in writing from the client (insurance company). You make it a copy of your file. You submit an appraisal including O & P (if it meets ) You make a note in your report that you acknowledge their request not to include it and you are allowing them (the client) the right to exercise their company procedure for handling. This is also known as " Please handle in your usual manner". They can communicate back to you if they insist that you provide a copy of your appraisal without this addition, you take it out and resubmit it back. The issue is written and documented. When the chips fall, you have your written document how events transpired. Sorry but it is a "if it is not written, it didn't happen, world". We all know that.

This post is not meant to be a legal authority expert opinion, but only to address a "general response" to a question. There are many factors which would apply to a "specific case or condition" that could significantly change the information contained.
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